Palladium Enterprises Ltd leased a machine on January 1, 2018. At the date of the lease agreement, the asset has an estimated useful life of five years. However, the agreement is expected to expire on December 31, 2019, and there are no plans to purchase the asset. Palladium depreciates similar assets over five years using a straight line basis. The annual lease payments are made on December 31st of each year. The lease payments are $2,500,000 per year, which includes insurance expense of $100,000 per year, as Palladium is required to insure the asset based on the agreement. The entity has incremental borrowing rate of 16%, but the rate implied in the lease is only 12% per annum. To assist with initiating the lease, the lessee incurred legal fees of $500,000 which was paid to its attorneys on January 1, 2018. Required: a. Prepare all relevant journal entries over the life of the lease. b. How are lease incentives treated as it relates to right of use assets?
Palladium Enterprises Ltd leased a machine on January 1, 2018. At the date of the lease agreement, the asset has an estimated useful life of five years. However, the agreement is expected to expire on December 31, 2019, and there are no plans to purchase the asset. Palladium depreciates similar assets over five years using a straight line basis. The annual lease payments are made on December 31st of each year. The lease payments are $2,500,000 per year, which includes insurance expense of $100,000 per year, as Palladium is required to insure the asset based on the agreement. The entity has incremental borrowing rate of 16%, but the rate implied in the lease is only 12% per annum. To assist with initiating the lease, the lessee incurred legal fees of $500,000 which was paid to its attorneys on January 1, 2018. Required: a. Prepare all relevant journal entries over the life of the lease. b. How are lease incentives treated as it relates to right of use assets?
Intermediate Accounting: Reporting And Analysis
3rd Edition
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Chapter20: Accounting For Leases
Section: Chapter Questions
Problem 1E: Determining Type of Lease and Subsequent Accounting On January 1, 2019, Caswell Company signs a...
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Palladium Enterprises Ltd leased a machine on January 1, 2018. At the date of the lease agreement, the asset has an estimated useful life of five years. However, the agreement is expected to expire on December 31, 2019, and there are no plans to purchase the asset. Palladium depreciates similar assets over five years using a straight line basis. The annual lease payments are made on December 31st of each year. The lease payments are $2,500,000 per year, which includes insurance expense of $100,000 per year, as Palladium is required to insure the asset based on the agreement. The entity has incremental borrowing rate of 16%, but the rate implied in the lease is only 12% per annum. To assist with initiating the lease, the lessee incurred legal fees of $500,000 which was paid to its attorneys on January 1, 2018. Required: a. Prepare all relevant journal entries over the life of the lease. b. How are lease incentives treated as it relates to right of use assets?
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